Economics “Econ, Econ” Econ

Resource Allocation Small Group Activity

Allocating Resources In economics the term Allocate = Distribute People and societies must decide how best to use their scarce resources. The following are examples of how resources may be allocated: Prices/Auction (supply/demand)-Distribution of resources is based on who can pay the price set at the markets. Very efficient b/c producers get quick feedback about how desirable their resource is. This method can exclude people who lack the money necessary to purchase the resource.

Allocating Resources Authority-One person, or a group of leaders decide how resources will be distributed. (dictators/autocracy) Decisions are quickly made b/c there is no debate. Resources are often hoarded by those in power, leaving some in need with nothing. Lottery(random selection)- Everyone has an equal opportunity to obtain the resources. Very inefficient because resources may be distributed to those who don’t need or cannot use them.

Allocating Resources Personal Characteristics-Resources are distributed based on need or merit. (those most deserving) Ideally resources are provided to those who have earned them. Personal characteristics can be used to discriminate against people based on race, religion, gender, etc. Contest-Resources are distributed to the ‘winner’. Winners/achievers are rewarded. Inefficient on a regular basis; especially depending on the number of resources and customers.

5 Key Economic Assumptions Society’s wants are unlimited, but ALL resources are limited (scarcity). Due to scarcity, choices must be made. Every choice has a cost (a trade-off). Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest.” Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice. Real-life situations can be explained and analyzed through simplified models and graphs.

Would you see the movie three times? Thinking at the Margin # Times Watching Movie Benefit Cost 1st $30 $10 2nd $15 3rd $5 Total $50 Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

Marginal Analysis In economics the term marginal = additional “Thinking on the margin”, or MARGINAL ANALYSIS involves making decisions based on the additional benefit vs. the additional cost.

Marginal Analysis Example You are out with your friends having a great time and stay out later than the curfew allowed at home. When you get home, you are told, “Wait until your mother sees you in the morning!! You will be in BIG trouble.” In the morning, mom asks you if you had a good time the night before, and tells you how disappointed she is, then leaves it at that.

Marginal Analysis Example Next Friday night, when the party of the century is taking place, and anyone who is anyone will be there…

Marginal Analysis Marginal Cost-The cost of obtaining 1 more of an item Marginal Benefit-The benefit associated with obtaining 1 more of an item. You will continue to do something as long as the marginal benefit outweighs the marginal cost. The MARGINAL ANALYSIS approach to decision making is more commonly used than the “all or nothing” approach.